Universal Credit red tape cull needed to help parents and the self-employed

Published on Tax and Welfare

Making Universal Credit (UC) easier to use could boost employment and prevent the risk of penalising families whose earnings and outgoings don’t fit into a neat monthly pattern, according to a new report published today (Monday) by the Resolution Foundation.

The think-tank’s nine-month review of Universal Credit considers how the once-in-a-generation welfare reform is equipped to meet the UK’s current and future welfare challenges.

The report examines the structure of UC and the trade-offs between supporting low-income households, improving work incentives and reducing costs to taxpayers.

But as well as examining the structure of the new benefits system, the report argues that some of the seemingly small issues related to how people interact with Universal Credit on a day-to-day basis are of vital importance if people are to find it reliable and easy to use.

It says that one of UC’s key strengths over the current system is its simplicity. Bringing together six separate working-age benefits will boost employment by making it easier for people to understand why they’re better off in work. But it warns that UC must be made more flexible, and that failing to do so could weaken some of the important work incentives it brings.

The report highlights how more than 800,000 self-employed workers moving onto UC will have to start reporting their income on a monthly basis, rather than annually through HMRC self-assessment. This will create a huge bureaucratic burden and could hit some low-earners financially.

Under UC, a self-employed worker’s benefit entitlement will be based on their monthly earnings. Big variations from month to month – common for those running their own business – could reduce their entitlement, particularly if their monthly earnings fall below a ‘minimum income floor’ equivalent to 35 hours a week at the minimum wage (which starts to apply a year after starting a business).

The design of UC could potentially mean self-employed workers receive significantly less financial support than employees earning the same annual amount. The review calls for the government to address this – and reduce the red tape burden – by bringing the reporting requirements on the self-employed into line with their annual tax return, and applying the ‘minimum income floor’ on an annual basis.

The review also warns that the requirement to provide childcare bills on a monthly basis could mean parents whose childcare costs are higher at certain times of the year are made financially worse off compared to the current system. It calls for childcare support in UC to be calculated on a quarterly basis. This will make it easier for parents facing lumpy bills to claim, allowing them to smooth their childcare costs in order to receive the maximum support available.

With the timing and frequency of benefit payments vitally important to households, the review also calls for greater flexibility so that recipients can choose a payment period that best suits their budgeting needs. It says that for those receiving help with their rent, the option of payments going straight to landlords should be more easily accessible. This would help families to budget properly, particularly if their income and outgoings do not fit UC’s neat monthly pattern, reduce the risk of rent arrears growing, and improve the accuracy of UC payments.

David Finch, Senior Economic Analyst at the Resolution Foundation said:

“Simplifying the benefits system in Universal Credit is a welcome reform that will help more people into work. But the current design also creates unnecessary extra red tape for many low-income families, which could leave them financially worse off.

“Almost a million self-employed workers moving onto Universal Credit will for the first time need to report their income every month. Many will receive less support than employees earning the same amount, just because what they take home varies from month to month. The treatment of the self-employed in Universal Credit is at odds with the government’s support for business and should be changed before workers start moving onto the new system.

“The government has rightly prioritised supporting working parents through its offer of 30 hours free childcare support. But many working families – and nurseries – will be frustrated by the new requirement in Universal Credit to provide monthly childcare bills. Relaxing this rule will help parents receive the maximum support available – and could encourage even more parents into work.”

How a self-employed worker could lose out under UC

A self-employed worker could in theory find themselves worse off compared to an employee with the same annual earnings and family characteristics.

An employee in a couple with one child, with a stable salary of around £12,000 a year, would earn £1,000 a month from employment, topped up with approximately £500 of in-work support.

But a self-employed worker also earning £12,000 a year may take home a different amount from month to month. For instance, earning an extra £200 in a given month than the employee would reduce their entitlement by £90, while taking home £200 less in another month would increase their entitlement by just £5. This is because the minimum income floor restricts their entitlement in months where earnings are lower than a full-time worker on the minimum wage.